Famine in North Korea: Markets, Aid, and Reform

Introduction

DEVIN STEWART: Thank you so much for coming. I'm Devin Stewart from
the Carnegie Council. Thanks so much for being here. This is a great
group. Welcome to our board room.

Marcus Noland is probably, I think, one of the smartest economists I know—as
well as Ed Lincoln, who is my teacher, sitting right here. I'm
actually kind of in awe of these two great minds in economics, who can talk
about economics in a way that makes sense to the rest of the world besides
economists.

Marcus Noland is talking about famine—an issue that is certainly a human
rights question and problem—and I think it is something that people don't
normally think about in the context of North Korea.

I've said this so many times now, but, I guess, U.S. foreign policy toward
North Korea is seen as either being a choice between isolating it and cutting
off proliferation of weapons, or perhaps engaging North Korea and getting aid
there and perhaps growing their economy. Maybe, it's an open model versus a
closed model. But the choice is sometimes seen by Asia specialists as human
rights on famine versus nonproliferation. So we failed on both accounts. I think
it is a damning record on our part.

Today Marcus Noland will talk about Famine in North Korea, a book that just came out. Joseph Stiglitz plugged this book as "the authoritative
account on famine in North Korea." Data is very difficult to get on North
Korea—that's why you don't hear a lot about these things—so to get a really
serious account of this crisis is something very special. I'm very happy to have
Marcus Noland here. I'll open it up to Marcus. He'll talk for about twenty
minutes to half-an-hour, I think, and then we'll have a Q and A, and maybe
coffee. Thank you.

Remarks

MARCUS NOLAND: Thank you very much, Devin. It's a great honor to be
here this afternoon, and I do, indeed, appreciate all of you who came out. I'm
spending this semester at Yale University, and it was not easy to get down here
from New Haven. I do appreciate those of you who made it here.

It's okay to laugh. There are very few opportunities for humor when dealing
with famine, and this may be my only shot this afternoon, so I thought I would
go ahead and take it. For those of you who may be listening on the podcast, I
have put a slide up behind me, which is the event listing from an issue of the
San Francisco Bay Guardian last month that says: "Famine in North
Korea: Markets, Aid, and Reform. Man, with a lecture title like that, I'm
not sure if I care how much Stephan Haggard and Marcus Noland know about North Korea ...
what a drag, man. I'll be chillin' with Connie Francis, thanks. Who knows,
though—maybe they'll show the Kim Jong Il 'I'm So Ronery' scene from Team America: World
Police."

In the 1990s, North Korea suffered one of the worst famines of the twentieth
century, a traumatic event that continues to reverberate through that society.

When people think of famines, we often have in our minds a kind of implicit
notion that when a famine occurs it's because there is not enough food to go
around and people starve. Both elements of that statement have elements of truth
to them. Famines usually are associated with adverse shocks to the food
supply—and I'll talk a bit more about this later.

But, as Amartya
Sen, the Nobel Laureate who wrote the foreword for our book, pointed out,
distribution also matters. In the past, countries have experienced famine when
there was enough food to go around, but poor people didn't have the resources to
purchase it. Perhaps the most famous example is the great Irish
famine in which Ireland exported food to Britain because the British had
money to pay for it, while indigent Irish starved. We argue that something
similar to this happened in the 1990s in Korea, that it was politics, not
economics, at the root of the famine.

The other part of this statement is that people who perish during famines
normally don't literally starve to death. They usually succumb to some other
sort of disease or illness in a weakened state. So, if I lapse and use the verb
"starve" in my remarks, please interpret it in the broadest sense.

The book is organized into three sections:

The first addresses the origins of the famine and its impact. We estimate
that perhaps 600,000 to one million people died. That would be roughly 3 to 5
percent of the pre-crisis population, which would be equivalent to about 15
million Americans dying if a similar event were to happen here today.

The second part of the book addresses the humanitarian and ethical dilemmas
posed for the outside world in dealing with a government as ruthless as the
government of North Korea.

The third addresses the legacy of the famine, which, we argue, continues to
reverberate through North Korean society and inform Korean government attitudes
on a variety of matters, including possibly the nuclear issue that Devin
mentioned at the outset.

Although the famine conditions have eased ten years on, we estimate that
roughly a third to perhaps a half of the North Korean population remains
chronically "food insecure." And we argue that the marketization of the North
Korean economy, which has occurred over the last fifteen years, is less a
product of a top-down attempt by the North Korean government to achieve
particular economic or political goals, but was rather an unplanned, unintended
development that arose out of the trauma of the famine and fundamentally out of
state failure.

When the state, which had organized both the production of food and its
distribution, was not able to fulfill its obligation, small-scale social
units—households, workplaces, local party organs, small-scale military
units—were all forced into entrepreneurial coping behavior, and the
marketization that began with the food economy then spread throughout the
economy. The result is that the famine, which started out as a kind of classic
socialist famine, where access to food was determined by political status, has
now morphed into a chronic food emergency, similar to what one would observe in
a market economy in which access to food is determined by one's ability to
command resources in the market.

The state's response to these developments has been fundamentally
ambivalent—in some ways legitimating them and ratifying them, in some ways
trying to channel them, and even in some ways trying to reverse them. Indeed, it
is that last one, reckless actions undertaken over the last two years, that have
brought North Korea possibly to the brink of another humanitarian disaster.
Indeed, at the end of March, Anthony Banbury, the Asia Bureau Chief of the World Food Programme,
announced that North Korea was a million metric tons short of food and millions
of people could go hungry unless donors increased their donations. I will
discuss that possibility at the end of my remarks.

But what I would like
to do is go back and basically now just walk through the book and those three
parts: first, the origins of the famine; secondly, the ethical dilemmas for the
humanitarian community; and finally, this legacy and what it may mean.

The origins of the North Korean famine lay in the state's misguided attempt
to achieve an understandable goal of national food security through a misguided
attempt at self-sufficiency. The state banned private markets. It controlled
both the production and the importation of food, as well as its distribution,
through a quantity rationing system called the Public Distribution System, or
PDS.

Now, given the inauspicious growing conditions in North Korea—very high ratio
of population to arable land, relatively high northerly latitudes, short growing
seasons, limited opportunities for double cropping, and so on—the only way the
North Koreans could maximize output was to maximize yield over a given acre. In
order to do that, they constructed a very industrial input-intensive form of
agriculture. It is a form of agriculture that used a lot of chemical fertilizer,
a lot of insecticides, pesticides, and electrically driven irrigation. So, it
was an agricultural system that was highly dependent on the health of the
industrial economy.

When the industrial economy began to falter in the 1980s, outputs and yields
began falling, as one can see in this chart on the left. So, depending on which
source of data you look at, production probably peaked around 1988 or 1990.

Now, faced with the dwindling output, the secular decline that we see in this
chart, the state fundamentally had three choices: one was to export more, earn
foreign exchange, and then purchase grain; second was try to borrow money on the
international market to purchase grain; or the third was to compress domestic
consumption. Regrettably, the state chose the third option, inaugurating a
"let's eat two meals a day" campaign and cutting state rations.

In the spring of 1995, with the country experiencing famine, North Korea
appealed initially to Japan, then South Korea, and eventually the United Nations
for support and assistance. The first shipment of aid was headed towards North
Korea in May of 1995. Later that summer the country was hit by floods. This
proved to be politically advantageous both to the government of North Korea as
well as for some in the donor community, who could portray the famine as a
product of bad weather rather than a product of bad policy. This chronology,
then, is very important. The decline in output and the famine preceded the
floods rather than was caused by the floods. Now, the floods were certainly not
helpful, but they were a minor contributing factor at best.

One of the most disturbing things we document in the book was that in the
mid-1990s—1995, 1996, 1997, 1998—as aid began ramping up, North Korea
systematically cut the amount of grain it imported on a commercial basis.

This is a chart where we have indexed total imports and food imports. As you
can see in the right-hand panel, food imports fall disproportionately, they fall
more than total imports; and then, as the economy begins recovering in 1999—and
today aggregate imports are higher than they were in 1993—food imports never
come back, and they remain minimal today. In effect, rather than using aid as a
supplement to the supply of food, North Korea used it, in effect, as
balance-of-payments support.

Now, as I said, there are basically two parts to the description of famine
and food availability. The first is aggregate availability and the second one is
distribution. In terms of aggregate availability, we show in the book that if
North Korea had simply maintained its imports at that level of 1993, then normal
human demand could have been met throughout the period. We have a whole series
of charts in the book of this sort, where we have various sorts of
counterfactual calculations.

This line shows normal human demand. This shows minimum human needs. This is
the line you would have gotten if they had just kept the imports at 1993 levels
rather than cutting them. Now, even accepting the fact that they cut imports,
the actual available food line always lies above the minimum human needs. So if
there are people who are perishing from a famine, distribution has something to
do with it.

Now, the way that all urban North Koreans received their food was through the
Public Distribution System. We can see from the data that, even on paper, from
1995 on the public distribution never delivered the minimum human need. In fact,
in recent years the Public Distribution System has been delivering about 300
grams a day.

Now, some of you may wonder how much 300 grams of rice or corn is. Let me
show you. That's 300 grams. I don't believe there is anybody in this room that
could last very long on this ration—and we all have desk jobs. Anyone doing
manual labor, who is actually using their body to work, cannot survive on this
ration of food. And indeed, sadly, many did not.

The result was a famine with pronounced geographic, socioeconomic, and
demographic components. For those of you who may be listening through the
podcast, I have put up a slide that has two images. One is a multicolored map of
the country and the other is an image of an emaciated North Korean child being
measured by UN workers in 1997.

These two images are supposed to convey
two points. The first is that the effects of the famine were not uniform
geographically. In general, the southwest of the country was the best off. The
rust-belt industrial cities of the northeast were the worst off. This data is
from 1997, and we can't see that because the data for all these provinces is
missing. I'll come to that in a second. At the time, the North Korean
authorities would not allow the UN workers into these provinces. Subsequently,
they gained access. In fact, we could document that this was indeed the worst
affected. And then, of course, in demographic terms, the very young and the very
old were the worst hit.

As I mentioned at the outset, we estimate that about 600,000 to a million
people died. That would be about 3 to 5 percent of the pre-crisis population.
More broadly, the World Food Programme (WFP) data implies that, for instance, in
1998 North Korean seven-year-olds were 20 percent shorter and 40 percent lighter
than their South Korean counterparts. So it's not just death; there is
widespread malnutrition as well.

Indeed, one of the things we do in the book is we actually look at the data
going all the way back to the Japanese colonial period. If you accept these data
as being accurate, they suggest that this group of North Korean seven-year-olds
measured in 1998 were smaller than any cohort of Korean seven-year-olds in
recorded history, going all the way back to 1910 when the Japanese colonial
authority started keeping these records.

This disaster posed an enormous challenge for the international humanitarian
community. In trying to ameliorate this emergency, the humanitarian community
faced a fundamentally hostile environment. The North Koreans would not allow
normal assessment and monitoring activities. As a consequence, the World Food
Programme and the private NGOs that effectively piggybacked on their protocols
were forced into a kind of second-best solution of targeting institutions where
they thought there would be people in need—so targeting orphanages, elementary
schools, hospitals, and so on. Indeed, they ended up with a list of more than
40,000 such institutions throughout the country.

Unfortunately, more than ten years into this program, the North Korean
government has never provided the WFP with a comprehensive list of all these
institutions. Nor is the WFP allowed to use Korean speakers. No Korean speakers,
no ethnic Koreans, are allowed to be in the country. And generally,
pre-notification was required to visit any of these institutions, most of the
time around one week. So the WFP was reduced to using less than 50 people to run
a food program that was supposed to be targeting 40,000 institutions in a land
area the size of New York state or the state of Louisiana, none of whom could
speak Korean, all of whom were dependent on government-supplied drivers and
interpreters, despite the fact that at its peak the international humanitarian
aid program, in principle, was feeding a third of the population.

Now, under such conditions, with such large volumes of aid going in—think
about it, enough food to feed a third of the population, less than 50 people
working under very difficult circumstances—there was ample opportunity to divert
aid away from its intended recipients.

Let me say two things about this.
Normally, people think of diversion of aid as kind of being a centralized
conspiracy in which the aid is diverted from less-deserving people to some other
group, typically the military. That may have happened, although we argue in the
book that the incentives and opportunities for diversion were probably much
greater lower down the food chain, to use a bad metaphor, that it was local
officials and local actors who really had both the opportunity and the incentive
to divert.

The other thing is oftentimes people when they think about the
aid being diverted, they stop thinking at that point. But the aid didn't vanish
into the ether. It was consumed somehow. One of the things we argue is that in
this context, in the context of an economy where markets have been eradicated,
the availability of food aid, the weak monitoring, and the opportunities for
diversion actually had a profound and ambiguous impact.

The implicit value of this aid was astronomical, because remember this was a
country experiencing a famine, so the real price of food is very high. If one
could divert the aid and sell it, one could get rich. But in order to recognize
or realize those profits, you need markets.

So, ironically, powerful people within North Korean society had an incentive
not only to divert aid but to encourage the development of markets. And indeed,
we estimate that by the latter part of the 1990s and the early part of this
decade, the typical North Korean household was actually getting most of their
food through the market. That was the institutional mechanism by which people
were actually getting food. With the state having trouble procuring food in the
countryside, the Public Distribution System had basically become a mechanism for
distributing aid. The marketization that began with food spread to other
products. We spend a fair amount of time detailing the institutional mechanism
through which this marketization occurred, much of it oriented toward China.

In 2002, the government, in essence, acknowledged the marketization of the
economy which had begun a decade earlier, in some ways ratifying and
decriminalizing much of the coping behavior that had occurred, but in other ways
trying to control or even reverse it.

The inexpert ways that the reforms were implemented, however, have
contributed to high levels of inflation and widening inequality within North
Korea. The industrial proletariat of those old industrial cities, especially on
the east coast, have been the hardest hit, with World Food Programme household
surveys indicating that some families were spending 40, 50, 60, 70, as much as
80, percent of their household budgets on food.

This is reflected in changing pathways to status and power. As one person
said to me, it used to be that party cadres and state officials were the
preferred sons-in-law; now it's military officers and entrepreneurs.

So in the context of several years of improving harvests, in the fall of 2005
the government of North Korea undertook a series of actions that could only be
described as reckless. First, they banned the private trade in grain, in effect
criminalizing the primary institutional mechanism through which most North
Korean households actually obtained food. Second, they engaged in confiscatory
seizures of grain in the rural areas.

Let me stop for a moment and do a brief aside on this because I think it is
very important. There was a history of confiscatory seizures in North Korea.
They have happened periodically in response to urban shortages. In 1995, the
government went through the normal procurement process during the fall. What
happened was the farmers on the cooperative farms were given an allocation which
they get to keep, which is supposed to feed them and their families for the
remainder of the year. So the farm families get an annual in-kind allocation,
and then basically the rest of the harvest is sold to the state at this derisory
procurement price.

What happened in 1995 was the state went through the procurement process and
then realized it didn't have enough food to make the PDS work. So it sent the
army back into the countryside to essentially try to extract from the farmers
the food that had already been allocated to them for their own consumption for
the next calendar year.

In 1996, fully one-half of the corn harvest disappeared. Now, the initial
explanation was flooding, and indeed there was flooding in North Korea in the
summer of 1996. But if you look at a map of North Korea showing the counties
where there was flooding and the counties where they grow corn, flooding can't
explain the disappearance of half the corn harvest, just like flooding in 2006
can't explain the fall in recorded output.

Steph Haggard and I actually wrote an op-ed in the International Herald Tribune in December
of 2005 saying that the North Korean government was now possibly on a trajectory
towards a renewed humanitarian disaster in the spring of 2007 because the
farmers were going to protect themselves in the next harvest cycle.

To make matters worse, at the same time they were trying to ban the market,
revive the Public Distribution System, and engage in predation against the
cultivators. They, in effect, tried to throw out the humanitarian aid
groups.

The World Food Programme, which had had something on the order of 45 to 50
people in the country, not only in the capital city of Pyongyang but also in a
series of five regional sub-offices, had those offices closed; the number of
staff reduced to, I think, seven—less than ten people—and confined to the
capital city of Pyongyang, who were only allowed to leave the capital city once
every three months on supervised field trips. So, to use an American idiomatic
expression, they took the canary out of the mineshaft. They took away our
early-warning system because this is how we had a lot of information about
actual conditions outside of Pyongyang in those industrial cities and in the
countryside.

So those three things—inaction on the demand side, inaction on the supply
side, and then the removal of information—set up this possibility of renewed
emergency this spring.

Indeed, as I mentioned at the outset, last month Tony Banbury had a press
conference and announced that the North Koreans were a million metric tons short
and began sounding the alarm about a possible new food emergency. I say
"possible" because the government of North Korea restricts information to such
an extent we really don't know how bad it is. Some observers, such as the WFP,
and the South Korean NGO Good Friends, take the position that this is a true crisis.

Yet, to the extent that we can imperfectly—and I want to underline
imperfectly—observe prices in the markets that have in fact come back, prices
for grain do not appear to be skyrocketing, which suggests that there are
supplies, presumably either from China or through stocks that the farmers have
hoarded, that are being sold into the market.

The real issue—and I don't want it to be lost in this welter of detail—is
that the government of North Korea systematically impedes access and prevents
the world community from assessing the degree of need and designing an
appropriate response. It is fundamentally about the government of North Korea's
policy.

So what do we take away from all this? Well, first, the famine and its
aftermath are inseparable from the authoritarian nature of the political regime.
Only a regime that systematically restricts all human civil and political
rights, prevents the spread of information, prevents debate over policy,
criticism of public officials, and basically is unaccountable to the populace
could have acted with such culpable slowness in the 1990s and maintained such
disastrous policies in the face of a humanitarian emergency, regrettably
something that they may well be doing again today. In the end, only a regime
that is accountable to the people, protects their basic rights to produce and to
exchange, allows them to do what's best for themselves, will enable a permanent
resolution of the food emergency.

Now, the economic form of that resolution would not be for North Korea to
achieve agricultural self-sufficiency. That's a dream. The way that this crisis
will be resolved in the long run is if North Korea's industrial economy is
revived so that North Korea can export manufactured and mineral products, earn
foreign exchange, and import bulk grains from commercial firms, just like South
Korea does, just like Japan does, and just like China does.

The third issue, which I haven't discussed much, is that the political
interests of the donors are divergent. Let me just draw one inference from that.
The inference we take, that it is a strategy of attempting to strangle the North
Korean regime and provoke regime change or collapse, is unlikely to work. The
reason is quite simple: if the United States or the Japanese or, perhaps, the
Europeans cut off aid in an attempt to do that, then North Korea's immediate
neighbors, South Korea and China, which for understandable geographical reasons
are more risk-averse to the possibility of chaos and instability within North
Korea than countries that are further afield, will simply move to offset that by
increasing aid. So there is a fundamental coordination problem here that we
think undermines a policy of attempting to provoke regime change and solve the
problem that way, by economic embargoes or sanctions.

As a consequence, we conclude that there is no real ethical choice other than
to engage. But we should be clear-eyed about the terms on which that engagement
proceeds and we should seek to further our own values whenever possible.

I would like to close with a metaphor, which is, like all good metaphors, at
once both trite and profound. It was offered by Kang Chol-Huan, who himself is
an escapee from the North Korean gulag. What Kang said was: "If you hold a cow
by its hoof, it will starve. If you allow it to roam, it will find grass and
eat." Ultimately, the solution to the North Korean food problem is a political
regime in North Korea that allows the North Korean people to do what is best for
themselves.

Thank you very much for your attention. I would be happy to try to answer any
questions that you might have.

Questions and Answers

DEVIN STEWART: I totally agree with Marcus that engagement is probably
the way to go. As I opened up, I think that it is the ethical path.

I was wondering if you could comment a little bit about perhaps the nature of
engagement that would seem to work. And also, what's going on with South Korea
and North Korea in terms of economic exchange and activity? If you ever follow
Asian news, you read these interesting tidbits that get hidden from the
mainstream press about roads being built and train tracks being laid and
factories being opened in the border there. I'm just wondering if this is having
any kind of positive effect.

MARCUS NOLAND: Those are two good questions. In fact, they actually
lead into each other in a very nice way.

Let me give you, first of all, a little technocratic answer to the first
question, engagement that works. I think in the case of North Korea we have to
face the fact that we are dealing with a highly vulnerable population that has
no real voice, that has no real control over the action of its governance. So it
seems to me what we would like to do is try to ameliorate the suffering of that
population. But, we want to try to do it in a way that, number one, is efficient
and, number two, promotes our values and not the values of a government which I
believe is at root the problem.

Let me give you an example, and it's an example from the Bush Administration.
I would like to indicate that I am a former employee of the Clinton
Administration, so this is not boosterism for the Bush Administration. When the
Bush Administration came to office, it appointed a man named Andrew
Natsios as administrator of USAID. Andrew had a deep interest in famine issues, and indeed
had written a book on the North Korean famine. One of the useful things that the
Bush Administration did under Andrew Natsios's leadership is put a requirement
on U.S. donations to the WFP. The United States is the primary donor to the WFP
program, or has been historically.

What Andrew said was that a significant share—I believe three-quarters—of the
food aid needed to go into ports on the northeast coast where the worst problems
were. The idea was, even if that food is stolen and diverted the moment it
leaves the ship, markets in North Korea are not perfectly integrated, they're
fragmented, and the fact of the matter is that food would be sold in the
catchment area around that area.

So the first-best solution would obviously be that food aid go to the
intended recipients, whether they be widows or orphans or children or whoever,
but the second-best is that the poor families in that area buy the food in the
market. So it is not necessarily the best allocation of food, but it is a kind
of second-best way of dealing with it.

Another thing one can do is provide food aid in forms that the elite don't
like to consume. So provide barley or millet instead of rice. Again, it reduces
the likelihood of this aid being stolen or diverted into elite consumption.

So one can do things of that sort that increase the effectiveness of the
humanitarian aid program even within these extremely difficult political
constraints. I would point out that these sorts of tactics differ fundamentally
from the food aid policies pursued by the governments of China and South Korea,
which basically simply hand rice to the central government. This is one of the
reasons that Steph and I have consistently urged the governments of South Korea
and China to donate more of their aid via the WFP, because we believe the WFP
protocols are fundamentally more effective.

We also note that if South Korea became a major donor to the WFP, it would be
increasingly untenable for the government of North Korea to maintain its
restriction of not allowing ethnic Koreans or Korean speakers to serve
in-country. So you could increase the effectiveness of the program even further.

Now, the second question is about South Korea's engagement with North Korea.
Indeed, I have a bunch of slides about this, although not as part of this
PowerPoint, but if you're really interested, I guess I could probably put them
up. Increasingly, North Korea is economically integrating with two countries,
China and South Korea, but the nature of that economic integration is
significantly different between the two.

Being only slightly facetious, when we look at the nature of economic
integration between China and North Korea, we see that the firms and enterprises
from the communist country are behaving like capitalists. But when we look at
the economic integration between South Korea and North Korea, we see that the
firms and enterprises from the capitalist country are behaving like the
socialist tools of foreign policy.

What do I mean by this? I mean that while China does provide North Korea with
aid, and while there are certainly forms of economic integration between the two
countries that are politically determined, it appears that increasingly economic
integration between China and North Korea is occurring on market-conforming
terms.

The Chinese firms and enterprises that are going into North Korea are not
charitable enterprises and they demand to be paid. So, it is a market. It is a
Chinese-style market—maybe not a World Bank-style market, but it is a market
that is developing.

In contrast, if you look very carefully at the economic integration between
South Korea and North Korea, it has a very large official transfer component to
it, whether it be outright subsidies, it be various forms of investment
guarantees and insurance, and so on. So that when you strip out what is either
straight aid or what is subsidy and so on, it appears that the amount of
economic integration between North and South Korea that is really on market
terms is rather small.

Now, I want to be clear—I have criticized both the governments of China and
South Korea already this afternoon—that this is not purely because of South
Korean policy. For understandable political reasons, it would appear that the
government of North Korea is actually more comfortable with Chinese firms
wandering around the North Korean countryside than it is with South Korean firms
wandering around the North Korean countryside. So the South Korean economic
initiatives have really been literally confined in a physical sense to these
sorts of enclaves. Now, in the end this may be a first step, it may broaden out
and so on, but right now I would have to say in some ways China is leading this
process of globalization, so to speak, of North Korea, not South Korea.

DEVIN STEWART: Why is North Korea more comfortable with the Chinese
firms?

MARCUS NOLAND: Because they are Chinese, they're not Koreans. Having
South Koreans, who are going to be physically larger, obviously more robust,
much better dressed, carrying fancy cell phones and all this kind of stuff,
could have a degree of political impact in North Korea that perhaps Chinese in
the countryside would not. Remember, North Korea still tells its people that
South Korea is worse off than it is. This presumably increased exposure of the
typical North Korean person with South Korean counterparts presumably would
create a significant cognitive dissonance that might ultimately have significant
political ramifications.

DEVIN STEWART: I'd like to open it up.

QUESTION: I have a couple of questions. Just to start, are the Chinese
firms generally small scale, coming in across that northern border, rather than
state-owned enterprises, I would assume?

MARCUS NOLAND: That's a very interesting question, and in fact it is a
question that Steph and I are about to begin to look at. We are literally going
to do survey work on exactly this topic. Our impression from our visits and our
interviews and what data we've been able to gather thus far is that the economic
integration takes a variety of forms. There is some straight aid. There is some
what I would call politically determined transactions, where a large Chinese
state-owned enterprise is told "go build a glass factory," right? But much of
this trade appears to take the following form. I'll take a minute because it is
an interesting though somewhat complicated story.

Let's start with the Chinese side of the border. There is a provision in
Chinese law that gives certain firms in the border region the ability to
transact what is called "border trade," which is basically tariff-free,
tax-free. My understanding of the origin of the law is it was originally just to
take care of all the normal, small-scale cross-border exchanges.

So what will happen is, say, a steel mill in Manchuria will identify a firm
in the border region, say in Tumen City, and they will form a joint venture in
order to get this legal status to do "border trade." Then, they want to import
low-grade coal from North Korea. What North Korea is exporting to China at this
point is mainly natural resource products, mainly minerals, and then some niche
natural resource products, such as ginseng, sea urchins, things of that sort.

Now, on the North Korean side you have, let's say, a state-owned
enterprise that used to make tractors, tractor factory number three. They
haven't made tractors, at least in volume, in years. Nevertheless, that
enterprise manager is told that he is responsible for covering his wage bill.
Now, the thing that he has going for him is that as a large state enterprise he
either has his own official trading company or he can do official trading
through the ministry. So essentially what he does is write down a wish list:
cheap televisions and radios, second-hand refrigerators, just all kinds of cheap
and secondhand Chinese consumer goods.

He has his purchasing agent go
into China. The deals are actually done in China so the Chinese counterpart has
recourse to Chinese dispute settlement. He has his guy go into China and round
up the cheap televisions and secondhand radios and refrigerators. This market is
actually big enough that there are specialized transportation firms on the
Chinese side. So you load it up on the truck, it drives to the border, there's a
land bridge across the river, he drives to the North Korean side and stops. The
truck is then offloaded. I talked to a Chinese owner. He would not allow his
truck to go into North Korea. He would never get it back. He turns around and
the North Koreans are responsible for hauling this stuff off themselves.

So then, having acquired these televisions and so on, he takes the former
workers at tractor factory number three and sends them off to sell them. What I
call this is the "Wal-Martization" of North Korea. The former industrial
proletariat, which used to have high wages, good benefits, they have been
reduced to marketing cheap Chinese imported consumer goods.

Now, how does he pay for it? The way he pays for it is he goes to his
counterpart, who is the manager of the coal mine, and he basically does a deal
with the coal mine guy to get the coal, which is then either literally bartered
or used to generate cash which is then used to pay for the televisions and
stuff. That stuff is all cash in advance.

So it is a complicated set of relationships and developments that are working
out. Some of it is "two steps forward, one step back." You talk to the Chinese
about this, you can hear some pretty bad stories about things that have happened
to them in North Korea. But it's of that nature. It is market conforming. The
North Koreans are having to pay them. They are having to give something up.

I was in southern Africa in the summer. I was working on a project involving
diamonds. I used some of your [Devin Stewart's] work in that project. I was
having lunch with the management staff and the union leaders from the world's
largest diamond mine in Jwaneng, Botswana. These guys were complaining, as did
their counterparts in South Africa, about their trouble keeping not only
engineers but skilled workers, the guys who could repair big diesel engines and
so on. The reason was that the Chinese-driven commodity boom, the worldwide
commodity boom, was so strong that those skilled artisans, blue-collar workers,
and mine engineers were being bid away for double and triple wages in projects
in Australia and Canada.

So here you are in the middle of Botswana and China's impact on commodity
markets is so profound it is affecting the labor markets in Botswana. Yet, when
you are in North Korea, it appears that, while the economy is doing okay, just
being on the Chinese border, the North Korean economy ought to be growing 8 or
10 percent. Instead, it is barely going along, sort of pulled along in that
slipstream, supplying some low-quality coal. That, if anything—the contrast
between Botswana, where the Chinese commodity boom affects the labor markets,
and North Korea, where the Chinese commodity boom has almost no apparent
effect—tells me that there is something fundamentally wrong about the internal
organization and capacity for supply response in the North Korean economy.

I know that was a very long answer. I'll try to be shorter.

DEVIN STEWART: In the meantime, let me just do a quick follow-up so
Marcus can rest his brain for a second. Let's talk about the book. I think we
have copies back there.

MARCUS NOLAND: And I'll be here to sign them.

DEVIN STEWART: Very gracious.

We always hear these crazy stories about North Korea. I mean North Korea is
great for crazy stories. I think there are some journalists here. I used to live
in Tokyo and I worked for the Yomiuri Shimbun. One of our favorite things
was to watch the ferry that would go back and forth bringing Asahi super-dry
beer directly to Kim Jong-Il. So we would just keep track of this ferry going
back and forth. The movie Team America is not that far from the
truth.

Any crazy stories you could relate from your research or data on North
Korea?

MARCUS NOLAND: Devin, my guiding philosophy on this has always been
that the reality of North Korea is bad enough that one doesn't need to
exaggerate, that in fact one should err on the side of being conservative. So,
for example, let me take one specific example from the book, famine deaths.
Estimates of famine deaths range from about a quarter-million people, which is
the North Korean quasi-official figure, up to, I think, 3 to 3.5
million—somebody may have even claimed 4 million. When we analyzed the data, the
most sober academic analysis one can do suggests 600,000 to a million people.
That's 3 to 5 percent of the pre-crisis population. If that were to happen in
the United States, that would be 15 million people.

In that situation, it may well be that someday, when in some sense the rock
is lifted up and we can see what's scurrying around underneath it, it may well
be the reality is worse than what we depicted. That is often the case in closed
societies. But I always tell people there's no reason to exaggerate; the reality
is plenty bad enough. Let me give you an example. It's not a crazy story.
Actually, I can't resist. I will tell you one crazy story. Okay, here's a crazy
story, but you get two for one in this story.

DEVIN STEWART: Very economical.

MARCUS NOLAND: I was in North Korea, and I got my minder alone, where
what we were saying to each other could not possibly be monitored. We had a
wide-ranging conversation that lasted several hours, a pretty frank
conversation. At one point in the conversation, he mentioned in passing that Kim
Il-Sung was god. I said, "Well, I'll grant you that, but how about Kim
Jong-Il?"

I will never forget his response. The response was, "Kim Jong-Il is 75
percent god." The conversation moved on and I never clarified whether he meant
that Kim Jong-Il was some kind of demigod or if that 75 percent of the people
thought Kim Jong-Il was god and 25 percent thought he was something other than
god. You know, this is a pretty odd story.

DEVIN STEWART: Or god is 175 percent of something?

MARCUS NOLAND: Several years later, I was at the George Herbert Walker
Bush School of Government at
Texas A&M University. As you know, the former
President Bush was also director of the Central Intelligence Agency. There
is a significant CIA presence at the Bush School of Government. In fact, I think
they literally have a position called CIA Officer in Residence.

The President was hosting a conference on North Korea and I was one of the
participants. One evening he hosted a public dinner. He recruited a man named John
McLaughlin, who at that time was the number two man at the CIA, to give the
after-dinner speech. The last time I checked, you can verify what I'm about to
say is true, because it's on the CIA website, or at least it was last time I
looked.

So John McLaughlin gets up, the number two guy at the CIA, to give this
after-dinner speech. We're sitting there at these round banquet tables. There's
several participants there. There's the man who's the head of the Blue Bell
Dairy, which is a big ice cream company in Brenham, Texas.

John McLaughlin gets up and he says, "Ladies and gentlemen, tonight I'm going
to talk to you about North Korea. North Korea is a very strange society. Let me
give you an indication of just how strange North Korea is. Once a foreign
traveler was traveling in North Korea and he got into a conversation with his
North Korean counterpart. The North Korean counterpart said that Kim Il-Sung was
god. 'That may be so, the foreigner replied, but how about Kim Jong-Il?'
'Seventy-five percent god' came the response."

I turned to the other people at the table and I said, "That's my
story." But here's the scary part. Did I tell this story to people who may be
working at the CIA? I'm sure I did. Did any of them ever come back to me and ask
me if I was telling the truth or is this beer talk? I mean no one was asking,
"When you talk about the guy saying Kim Il-Sung was god, were you really telling
the truth?" This kind of a joking conversation somehow goes up the ladder and
ends up in a public address by the number two man in the Central Intelligence
Agency and posted on the website.

So when it comes to funny stories, like I said, this one's a two-for-one,
it's a twofer. You know, I'm not sure who it says more about, North Korea or the
United States.

QUESTION: The question I have is that following through and checking
on the performance and whether the food is being distributed to these poor
people in North Korea is a challenge, and it will always be a challenge. From
what you say, it seems like at the state level, at least the NGO level, there
hasn't been success. Have you seen a success level with some private
enterprises, maybe small, that it seems like they are actually helping people
and keeping the government accountable for distribution?

MARCUS NOLAND: That's a really good question. One of the things we
mention in our book is that—let me step back for a second and give some context
for this.

What happened in the case of North Korea was you had this
famine emerge, it was an extremely closed society, very difficult engagement of
the humanitarian aid community. What happened was eventually, in the mid-1990s,
you had a situation where the primary in-country group providing food aid was
the World Food Programme of the United Nations. There were a bunch of private
NGOs that in quantitative terms were much, much smaller. More than 90 percent of
the food was coming through the WFP, but there was this group of small NGOs from
various countries, various types, some religious, some secular, and so on. They
essentially piggybacked on the World Food Programme protocols. They actually
formed something called FALU, or the Food Aid Liaison Unit, which was a way of aggregating the
activities of these many small NGOs. So in that sense the NGOs didn't get any
better deal than the WFP did in terms of access, the ones that were basically
just working through the WFP channels.

However, there were other NGOs
who managed to negotiate in some sense better terms of access, oftentimes by
trying to maximize their contact with local-level officials, whose incentives in
terms of monitoring, in terms of trying to keep up a smokescreen and so on,
might have been different than the central government officials.

One of the things we conclude in our book is that some of these small private
NGOs who had very small operations may have actually had more effective
monitoring regimes in reality, even if they did not on paper, that they had in
fact established enough essentially allies at the ground level among these local
officials who were involved in a kind of repeated game with them that, although
some of this was informal and maybe not down on paper, in effect they had a
better idea of where their aid was actually going than some of the larger-scale
official groups as well as NGOs.

Now, Devin asked for funny stories. I'll tell you this story, which is both
funny and frightening. This is a quote from Marx or Oliver Wendell Holmes,
depending on your politics: "History repeats itself; first it's tragedy, then
it's farce."

I had more than one conversation, independent conversations, with NGO
workers, some official, some from private NGOs, who told the same story.
Remember North Korea is a mountainous country. These people don't speak Korean.
They asked to be taken to a particular school or they asked to be taken to a
particular public distribution center. The North Korean government gives them a
car and a driver and an interpreter. They drive them around the mountains and
they take them to this place. The next day they are supposed to go to another
school or another public distribution center or another orphanage. They drive
around in the same car. They drive around in the mountains and they take them to
the place. I had more than one of these workers swear to me it was the same
place they had been taken the day before, but were told that it was a different
location. We laugh, but this is serious.

One of these people told me about just being horrified, realizing how
effectively powerless she was to do any sort of real assessment or monitoring of
her organization's activities. When she left North Korea and went back to her
home country, she literally got one of those "how to speak Korean" books and
simply concentrated on learning written Korean so that she could at least read
the road signs when she was taken out the next time she was sent into the
country.

She said they literally had no idea what county they were in,
they had no idea what province they were in. They just had been driven all
around the mountains. Especially if it's overcast, you can't see the sun, you
don't even really know what direction you're going, and then being taken to what
they thought were sort of "Potemkin
village"-type setups and really being taken to the same one. It's like Groundhog
Day—"No, really, this is a different school. You weren't here yesterday,
believe me."

QUESTION: You had a very interesting line about the desirable
son-in-law going from being party cadre to military or entrepreneurs, implying
that the famine has helped shift more power towards the military. If you'd speak
a little bit more about this, has it weakened Kim Jong-Il's political base, has
it strengthened the military, and in which ways? If you would, talk a little bit
more about that, please.

MARCUS NOLAND: That's actually a really deep issue. At the risk of
being shamelessly self-promoting, I actually have a small monograph that
addresses exactly this issue, called Korea After Kim Jong-Il. I think you can buy it used on
Amazon for like $1.98. It makes a great cure for jet lag if you're flying to
Asia.

One can conceptualize the famine having two effects. One is the economic
effect, which I really addressed in my remarks, that it encouraged a
marketization of the economy and eroded direct state power and control, helped
create a kind of new class of entrepreneurs, and so on. So that's one part of
the equation.

The other part of the equation was that period of the 1990s was also a period
in which the state failed. It basically began failing in some fundamental ways.
The Korean Workers Party, which had been a serious mass-membership communist
party, began to wither in terms of its actual functioning as a communist party,
as a mechanism for, for example, transmitting information from the ground up to
the central leadership and being a mechanism to ensure discipline from the top
down.

In that vacuum of governmental organs that simply failed to operate, a party
that was withering away, the military, almost by default—almost in relief, as
everything else receded—the military was the last institution standing. It had
organization, it had resources, it had coherence.

As the economy deteriorated, the military, which had been operating its own
economy—it had its own farms, its own factories, its own mines; it had its own
trading companies, preferential access to technology, all sorts of things—it in
some ways got sucked into the civilian economy because as things began falling
apart, the government increasingly turned to the military to literally fix
things—fix roads, fix bridges, harvest the grain, and so on.

That shift was then made manifest in shifting propaganda. The national
ideology had been Juche, normally translated as "Self-reliance." But in
the 1990s increasingly what we heard was "Military First." "Military First" was
used as an adjective, it was used as an adverb, it was used as a verb, it was
used as a noun. It was just increasingly the Songun ["Military First"]
policy that became the banner.

Since you are from the Japan
Center for International Exchange—and I know there are other people,
including Devin, who have backgrounds in Japan, as I do—one can imagine this as
being the way that North Korea in some sense could get itself off the
Juche hook, that the syllogism would go something like this: We must
have a strong army for national survival; a strong army depends on a strong
economic and technological base; hence, any sort of reform justified in terms of
improving the functioning of the economy or technological advance, no matter
what kind of departure it was from past practice, could be justified under the
"Military First" policy of national survival.

If you look at the propaganda and you look at the phraseology in the slogans,
they bear striking resemblance to Japan during the Meiji
Restoration. In effect, what Kim Jong-Il seemed to be wanting to do, or
seems to want to do, is have a similar political revolution, where a sort of
technocratic modernizers want to overturn past practices justified by the need
to have military capacity in a world that is so threatening that it could
actually threaten national survival.

The other example I would use is modern Turkey under Mustafa Kamal, where political revolution is basically done by
the military and justified as national survival.

But in the Kim Jong-Il campaign—he has a theatrical bent, as we all know—he
wants to play both the Tokugawa shogun and the Emperor Meiji in this production. He
will play both roles and then somehow carry this off.

So the whole issue of
"Military First," his increasing reliance on the military to govern, is a
complicated issue, because at once it could both represent the ascendance of the
most reactionary element in the polity, but at the same time it could also
represent an effective way, in some sense, to get one to resolve these
contradictions in Marxian terms and get one towards some kind of modernization
consistent with the maintenance of political control and stability internally.

QUESTION: Thank you very much for such a thorough, in-depth, and vivid
picture of the famine of North Korea. But I think that we are also concerned
about today's food shortage situation. As far as I know, till now we just have
two voices for today's situation in Korea. One is from WFP. One of the directors
said that there is a million ton food shortage; and the other one is from you. I
think you said that actually, North Korea is facing a severe food shortage, but
not as severe as the one in the 1990s. Would you please elaborate a little bit
on today's food shortage situation in North Korea? Thank you.

MARCUS NOLAND: To be clear, there are multiple voices. Tony Banbury,
the Asia Regional Director of the WFP, did hold a press conference in Beijing
last month, and he did say that they are a million tons short, that millions of
people would go hungry. He went into some greater detail about birth defects and
so on if donor donations did not ramp up. That analysis, that there is a genuine
and severe shortage, is also supported by the South Korean NGO Good Friends.

There are also other NGOs from South Korea, such as NK Net, who have contacts within North Korea and do things
like try to measure prices in North Korean markets, who are skeptical whether
the shortage is real or not.

I think, to be perfectly frank—and I say this with all due respect to the
World Food Programme and to Tony Banbury, and I think they do great work under
very, very difficult conditions—but the fact of the matter is Tony Banbury
doesn't know. He doesn't know how much food North Korea needs. How would he
know? He's got seven people confined to Pyongyang. He doesn't know what's going
on in the countryside. He doesn't know what's going on in Chongjung.

Good Friends may or may not know. NK Net may or may not know. The fact of the
matter is the North Korean government systematically impedes access to the
country that would allow anybody to do a persuasive assessment of the situation
and design an appropriate response. So it may well be that this is 1993 and 1994
and that we are starting to go into another famine and this is just the early
stages.

One of the astonishing things, if one goes back to that period of the
1990s—and we go over some of the history in the book, but we don't beat it into
the ground—is just how little people knew at the time. We have personal friends
who are very competent people who both visited North Korea at the same time and
came away with very different impressions, partly because conditions varied a
lot from region to region. They also varied a lot depending on what social class
you were in. And so you could have two people there in the same week, but,
depending on where you were, you might be seeing very different things.

And the same thing is true today. There is not one North Korean reality.
There are many North Korean realities, depending on where you are physically, in
terms of your social class, your access to foreign exchange, and so on.

Or it could be that we are in a situation like we were in 1995 after the
floods, where the government of North Korea swings from downplaying distress to
greatly exaggerating distress. Once you have made the strategic decision to say,
"Yes, we are really in distress, we need help," then you may make the decision,
"Well, once we admit that we are vulnerable, we might as well get all we can out
of this" and exaggerate the amount of distress and get more aid. So it could be
the case today that North Korea doesn't need a million metric tons of food, that
the government is just saying it because it knows it's under pressure.

Who knows what they may be preparing to do in terms of the nuclear program
further down the road, which could result in further sanctions further down the
road? So this might be a good opportunity to get a million tons of grain, put it
in storehouses, and then do something else that you know may result in further
sanctions. Nobody knows. With all due respect to Tony Banbury and the WFP and
Good Friends and NK Net, nobody has a good grasp of what is actually going on
there. The reason is the behavior of the North Korean government.

QUESTION: I was just wondering if it is too farfetched to contend that
famine or food shortage actually serves regime maintenance. How else otherwise
to explain the timidity with which they have experimented with reforms, such as
in Vietnam and in China? Is the paranoia based on that the entire regime is
basically propped up by the big lie in a sense, that North Korea is actually
more prosperous than South Korea, and that things could crumble very quickly if
foreign influences and a different perspective were to creep in?

MARCUS NOLAND: I think that's a very, very good question. There are
essentially two aspects of that question that I would like to tease out.

The first one is the sort of purely economic technical part of it, which is
you often hear people, especially people from Asia, say that "Well, North Korea
will adopt the China model." Usually, that's not defined exactly what that
means, but the implication is that North Korea will adopt the China model and
then it will start growing at 8 or 10 percent a year.

One of the things we argue in the book is that in structural economic terms
North Korea today more closely resembles Belarus or Romania at the time that
they started doing reforms than it does China or Vietnam, and that there are
reasons to believe that a reform process in North Korea would have a very
different economic and political trajectory than the reform process in China or
Vietnam, which, after all, had more than 70 percent of their labor forces in the
agricultural sector when they formally initiated it in the late 1970s and late
1980s, respectively.

The other issue, of course, is the one that you raise, the political issue
and the legitimization challenge that South Korea poses. Again, I think the
experiences in China and Vietnam are very instructive in this regard.

Let's start with Vietnam because that's the easier case. Vietnam had a civil
war. One side won. They became the monopolist definers of what it meant to be
Vietnamese. So in the late 1980s, when they decided to undertake reform, they
realized that Hanoi could come up with justifications, more or less tortured,
about how market area reformers were what Uncle Ho had in mind.
Fortunately, Uncle Ho had been dead long enough that he wasn't around to
comment.

The Chinese case is a little different. You've got that government in Taipei,
but I think for most people they would say that doesn't pose an ideological
threat to the government in Beijing. So in 1978-1979 Chinese ideologues
were free to come up with stories about black cats and white cats and slogans
and all this to justify that market-oriented reform is what Marx and Mao really
had in mind.

The problem for North Korea is much different because of the divided nature
of the Korean Peninsula. North Korea is clearly the junior partner in both size
and accomplishment. As you suggest, the economic reform it seems will start to
move them closer towards South Korea and erode what is distinctive about North
Korean society. That could pose a fundamental legitimization challenge for the
regime. Why be a third-rate South Korean when you can be the real thing?

In that monograph I mentioned, Korea After Kim Jong-Il, I go into a
lot about this, and trying to think through exactly what are the transitional
paths that a future non-Kim-Jong-Il-led North Korea could look like. I think
that this basic fact of life poses a real problem for would-be reformers in
North Korea.

They have one advantage, and it's an ironic advantage. The dynastic nature of
the North Korean state gives Kim Jong-Il a lot of leeway to legitimate what he
wants to do. He can always say—I mean look at today—the nuclear talks are being
justified in terms of Kim Il-Sung's dying wish, that Kim Il-Sung's dying wish
was for a nuclear-free Korean Peninsula. Now, one would have thought that simply
not building nuclear weapons could have assured Kim Il-Sung's dying wish without
having to build them and then give them away. But, you know, that's another
talk.

But Kim Jong-Il is in a completely privileged position to say that "We need
some sort of policy, we need to do something with the economy. ...Well, one
night my father and I were visiting Shinujoo and we were walking along the
beach that evening and he said to me, 'Whatever.'" You don't have to say
that Jesus came to you in a dream last night and told you to do it. I mean you
just say, "Well, in 1984 my father said, 'If you're ever in this situation, this
is what you do.'" So he can justify all of this that way and claim continuity
with the past and continue to claim legitimization through that source of
authority, even if he tries then to shift the basis of the regime.

I think that this is a good place to end. The thing that we draw away from
this, or the thing that I draw away from this, is that this is an extremely
risk-averse regime. They behave absolutely ruthlessly when it comes to their
core political goals narrowly defined. They will make concessions under duress,
but then they try to grab those concessions back when conditions change.

If this is the way they behave towards 50 do-gooders handing out free food,
can you imagine the kind of paranoia and attention that is going to surround a
serious attempt to monitor and verify some sort of denuclearization regime?
That's one of the big lessons from this book. If you look at how they behaved
towards these people handing out food, can you imagine what they are going to do
when we start sending in arms inspectors? It's going to be a very tough row to
hoe.

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